Two former JPMorgan Chase & Co. traders were indicted for engaging in a securities fraud to hide trading losses that eventually surpassed $6.2 billion on wrong-way derivatives bets last year.
Javier Martin-Artajo, who oversaw trading strategy for the synthetic portfolio at the bank’s chief investment office in London, and Julien Grout, a trader who worked for him, were named in the indictment, unsealed yesterday in federal court in Manhattan. The U.S. announced preliminary charges against the men in August.
Both were indicted by a grand jury on five counts, including securities fraud, conspiracy, filing false books and records, wire fraud and making false filings with the U.S. Securities and Exchange Commission. The pair, along with unidentified co-conspirators, are accused of engaging in a scheme to manipulate and inflate the value of position markings in the synthetic credit portfolio, or SCP. They face as long as 20 years in prison if convicted of securities fraud, the most serious charge.
Martin-Artajo and Grout were named in criminal complaints filed Aug. 14 by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara. They were accused of four separate counts of conspiracy, falsifying books and records, wire fraud, and false filings with the SEC. The indictment formalized those counts, adding the securities fraud charge.
The two “manipulated and inflated the value of position markings in the Synthetic Credit Portfolio in order to achieve specific daily and month-end profit and loss objectives,” the government alleged in the indictment. “They artificially increased the marked value of securities in order to hide the true extent of significant losses in that trading portfolio.”
JPMorgan has agreed to pay at least $750 million to resolve U.S. and U.K. regulatory probes of its record trading loss, people with knowledge of the negotiations said. The bank is seeking to settle as many inquiries as possible before the third quarter ends Sept. 30, said the people, who asked not to be identified because the talks are private.
The Justice Department is investigating JPMorgan over the trading losses tied to the prosecution of Martin-Artajo and Grout, possible manipulation of the energy markets and whether Bear Stearns, which the firm acquired in 2008, provided misleading information about its mortgage products prior to the financial crisis, said a person familiar with the matter who requested anonymity because the matter isn’t public.
The criminal probes aren’t affected by the expected regulatory settlement, said the person.
Additionally, the Commodity Futures Trading Commission, which has been investigating whether the bank manipulated trading in credit default swaps, is unlikely to announce a settlement at the same time as the other regulators, people familiar with the matter said.
Bruno Iksil, the Frenchman at the center of the trading loss case who became known as the London Whale because his portfolio was so large, wasn’t named in yesterday’s indictment. He signed a non-prosecution agreement with the U.S. in June, Bharara said last month, and has pledged to cooperate with prosecutors as part of the deal.
A lawyer for Grout, who reported to Iksil, said his client was “totally dependent” on Iksil’s instructions and expertise.
“It is astonishing that the prosecutors are relying on Iksil’s testimony when he is the one who taught Mr. Grout how the bank was marking the portfolio, gave specific instructions on where he should mark positions, and personally approved the marks on a daily basis,” Ed Little, a partner at Hughes Hubbard & Reed LLP, said today in an e-mailed statement.
Lista Cannon, a lawyer for Martin-Artajo, didn’t return a call seeking comment on the indictment. Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on the charges. Jonathan New, a partner at Baker Hostetler LLP who is representing Iskil, didn’t return a call seeking comment.
The U.S. said that at its most profitable point in 2009, the SCP produced more than $1 billion in revenue for JPMorgan.
Martin-Artajo “engaged and directed” the scheme in order to enhance his apparent job performance and position at JPMorgan and eligibility for promotion and bonuses, and to “forestall a possible plan by the bank to move the synthetic credit portfolio to JPMorgan’s investment bank,” prosecutors said.
Grout was accused of participating with Martin-Artajo in the conspiracy to “curry favor with his supervisor and to enhance his apparent job performance,” according to the indictment.
While the government said other unidentified co-conspirators acted with Martin-Artajo and Grout, the indictment described “Trader #2” and “Trader #3” as JPMorgan employees who worked in London for Martin-Artajo at the Chief Investment Office. “Trader #2” had the responsibility for marking the positions of the SCP when Grout was unavailable or out of the office, prosecutors alleged.
Beginning in January 2012, the SCP began to lose money so Grout marked the positions and reported about $100 million in mark-to-market losses, the U.S. said in the indictment.
The losses “did not go unnoticed” by the chief investment officer who was Martin-Artajo’s direct superior at the bank, prosecutors said. She sent him an e-mail stating that the portfolio’s financial performance “is worrisome” and that there was a need to “urgently reevaluate” the core position. Martin-Artajo “was directed to focus his attention on the SCP’s performance,” the U.S. alleged.
The losses continued at the SCP, placing Martin-Artajo under “continued and increasing scrutiny and pressure” from the executives senior to him, prosecutors said.
“Martin-Artajo, in turn, began pressuring Julien Grout and “Co-conspirator-1” to ‘defend the positions’ near the end of the month,” the U.S. alleged in the indictment.
The SCP reported about $100 million in mark-to-market losses at the end of February, the U.S. said.
Martin-Artajo and Grout then began to “more aggressively” hide the losses in March, causing false entries to be made in the bank’s books and records both intra-month and at month-end, the U.S. said.
Co-conspirator-1 was “uncomfortable” following Martin-Artajo’s direction not to report the losses and asked Grout to create a spreadsheet tracking the difference between Grout’s manipulated marks and objective market data. He also later directed Grout to send a copy of the spreadsheet to Martin-Artajo.
By March, the U.S. said, Martin-Artajo directed Grout and the unidentified co-conspirator not to show any additional losses and instead directed traders “to continue to show gains.”
Martin-Artajo told the subordinates that no losses were to be reported in the marks or to bank’s management unless there was an identifiable event that traders could refer to explain the negative price movement, the U.S. said.
“Martin-Artajo claimed that this was what ‘New York’ -- that is, the bank’s senior management in New York -- wanted, explaining that those JPMorgan officials did not want to see day-to-day market volatility,” according to the indictment.
The U.S. said that Co-conspirator-1 repeatedly sounded the alarm about the scheme. Co-conspirator-1 suggested in Mid-March of that year that he, Grout and Martin-Artajo adjust the SCP to reflect the true market data or even to take a “one-off” loss to catch up with the market, prosecutors said. Martin-Artajo rebuffed the suggestion, the U.S. alleged.
In an instant message chat on March 16, 2012, Co-conspirator-1 warned Grout not to “better” efforts to disguise a loss to superiors, according to the indictment. He added, referring to Martin-Artajo, “I don’t know where he wants to stop, but it’s getting idiotic.”
In August, Bharara said the co-conspirator who exchanged that and other messages with Grout was Iksil. Iksil was also directed by Martin-Artajo to mismark books, Bharara said then.
Mismarkings of the portfolio continued into April 2012, the U.S. said. The two men later caused JPMorgan to make false filings of books and records with the SEC from March to May of 2012, according to yesterday’s indictment.
Prosecutors seek forfeiture from both Martin-Artajo and Grout for any illegally obtained proceeds they earned in the scheme as well as the salaries JPMorgan paid them during the time they committed the alleged crimes.
Bharara has urged both men to surrender to U.S. authorities to face charges that they hid the bank’s trading losses on derivatives. Lawyers for Grout, who is a French citizen, have said he’s in France.
Martin-Artajo was released from police custody in Spain after telling a Madrid court that he opposed attempts by U.S. prosecutors to extradite him to face prosecution in New York.
The bank’s bad bets on derivatives, placed by Iksil, prompted authorities on two continents to open investigations into the firm’s controls and disclosures last year. The SEC, the Office of the Comptroller of the Currency, the Federal Reserve and the U.K.’s Financial Conduct Authority are among watchdogs planning to sanction the lender, the people said.
JPMorgan may make some admissions while settling with the SEC, such as conceding that it erred in how it oversaw the traders and their unit, a person briefed on those talks said last month. The bank isn’t likely to admit mistakes beyond what it disclosed when releasing the results of an internal review earlier this year, the person said.
Chief Financial Officer Marianne Lake told investors last week that the quarter’s addition to legal reserves would “more than offset” about $1.5 billion of consumer reserve releases.
The case is U.S. v. Martin-Artajo, 13-cr-00707, U.S. District Court, Southern District of New York (Manhattan). The SEC case is Securities and Exchange Commission v. Martin-Artajo, 13-cv-05677, U.S. District Court, Southern District of New York (Manhattan).